• Professor Robert Fogel
    Posted by on December 4th, 2005 at 6:46 pm

    Here’s an interesting Sunday read. This is an interview with Robert Fogel who won the Nobel Prize for Economics in 1993. He’s discussing his recent book The Escape From Hunger and Premature Death: 1700 to 2100.
    Fogel has been a pioneer in using statistics to help explain economic history. Here’s a sample from the interview:

    Nick Schulz: The first chapter of the book is called, “The Persistence of Misery In Europe and America Before 1900”. What was so miserable about life before the 20th century?
    Robert Fogel: Well first of all it was short. The life expectancy, if I can go back to 1700, was only about 35 years at birth. In 1900, 200 years later, it had increased by about 12 years — it was in the neighborhood of 47 in Western European countries. And, today it’s 77 or 78, so in a century we added 30 years to life expectancy, maybe a little bit more.
    Nick Schulz: That’s obviously unprecedented for life expectancy to increase by such a large amount in one century. What were the primary drivers of that?
    Robert Fogel: Public health reform, cleaning up of the water supply, cleaning up of the milk supply. But if you said what was the single most important factor, it’s technological change.
    Let me give you one small example. We complain a lot about air pollution today, but there were 200,000 horses in New York City, at the beginning of the 20th century defecating everywhere. And when you walked around in New York City, you were breathing pulverized horse manure — a much worse pollutant, than the exhausts of automobiles. Indeed in the United States, the automobile was considered the solution to the horse problem because pulverized horse manure carried a lot of deadly pathogens.
    So technological change made it possible to greatly increase the food supply and permit levels of nutrition that were not previously attainable. Secondly, it made it possible to have a safe water supply. We needed a more modern technology to be able to carry away waste water and provide safe water, both through filtering and chlorination. And, still another area was the development of vaccines, which made it possible to inoculate the very young against diseases. And with better nutrition, you greatly increase the physiology of human beings.

    Speaking of Nobel Prize winners, today is Milton Friedman’s 93rd birthday! He’s two years older than the Federal Reserve.

  • Do We Become Better Investors as We Age?
    Posted by on December 4th, 2005 at 12:42 pm

    Two finance professors say “no.”
    George M. Korniotis and Alok Kumar looked at the data from a brokerage firm and found that older investors trail the youngsters in terms of stock-picking. The good news, however, is that older investors are better diversified and they trade less frequently.

  • Carl Icahn Against Time Warner
    Posted by on December 3rd, 2005 at 9:12 pm

    I have to admit that watching Carl Icahn in action is a lot of fun. Most people have that one friend who enjoys fighting. That’s Carl. I think fighting is one of the things in life that truly makes him happy.
    Raider Carl is now at war with Time Warner (TWX). More specifically, their CEO Dick Parsons. It’s like when a sports announcer says, “these two teams just don’t like each other.” Let’s just say that Icahn has been somewhat critical of Time Warner’s management (“Morons are running all these companies”).
    His beef is that he wants Time Warner to sell off its cable unit and increase its share buyback to $20 billion. Personally, I don’t get too emotional about share repurchases, but the fact is that the stock hasn’t done much of anything for years.
    The company tried to meet Icahn half-way by raising the buyback from $5 billion to $12.5 billion. Well, Carl was not pleased. But what made him even angrier (meaning happier), is the idea of selling off AOL too cheaply. In my opinion, that would be technically impossible, but Carl has his views (“I’m going to hold the board of Time Warner personally responsible if they give away AOL the wrong way for the wrong reasons”). Um, Steve Case resigned two months ago, and the “AOL” has been taken off “AOL Time Warner.” You figure it out.
    Icahn is now threatening a proxy fight. It’s rare—but not unheard of—for entire boards of directors to be tossed out. I’d love to see this happen more often. There are even companies who specialize in assisting dissident shareholders in proxy fights. It’s sometimes easy to forget, but shares of stock are claims on real assets.
    Here’s my take: So what if Icahn wins? The market doesn’t hate Time Warner because of Dick Parsons. Icahn does, but not the stock market. The market hates Time Warner because it’s Time Warner. I can’t think of any media stocks that are doing well. Look at the cable stocks. Cablevision (CVC) and Comcast (CMCSK) haven’t done anything either. The market doesn’t like the industry because the industry is in rough shape. The cable industry is under threat from every direction. Even The New York Times (NYT) is fighting for more revenue.
    Icahn is probably right that the music group was sold too cheaply. He’s probably right that there’s too much bureaucracy at the top. And splitting up the company could be a good idea. But I don’t see how that will “unleash” any significant shareholder value. The problem is there has to be something there in place to unleash. Spin-offs aren’t mergers in reverse. Ichan’s plan is a concept searching for value.
    Cendant (CD) shareholders really were punished by a merger that hindered valuable companies. I think the same thing is going on right now at Citigroup (C). Stocks like Bear Stearns (BSC) and Lehman Brothers (LEH) are soaring while Citigroup’s stock languishes. That ain’t right.
    But Time Warner’s problem isn’t its corporate structure. Or rather, it’s the least of its problems. Still, this fight will be enjoyable to watch. If Time Warner were smart, they would make the proxy vote an HBO pay-per-view event. Hire Michael Buffer. Get Mills Lane. But whatever you do, don’t buy the stock.

  • Danaher Buys Visual Networks
    Posted by on December 3rd, 2005 at 5:41 pm

    One of my favorite stocks is Danaher (DHR). The company doesn’t get much press, which I don’t mind at all. I guess its business, making tools, is bit dull. Still, the company is very profitable, and that’s something I never find dull.
    Yesterday, Danaher said that it’s going to buy of the great tech wreck stocks, Visual Networks (VNWK). I know all these stocks tend to blur together, but Visual was a complete disaster in a universe of disasters. How badly did Visual Networks crash and burn? Five years ago, the stock hit $83 a share. Danaher is buying it for $1.83 a share. Yep, that’s a nice 98% savings. Last year, Visual earned $15,000. Not a share, $15,000 total. In some states, they might qualify for welfare.
    Danaher’s earnings have kept humming along all year, even though the stock has been pretty lazy. I think this is another bargain staring us in the face. The company recently reiterated its earnings for the fourth quarter. I always like seeing that. I’d much rather hear that there’s no major news at a good company, than a series of press releases from a turnaround stock.
    Let’s play with the numbers. Danaher should make about $2.75 a share this year. That’s a nice 20% from last year. To be safe, let’s say that earnings grow by 16% next year to $3.20 a share. I think Danaher could easily sport a forward P/E ratio of 20. That’s slightly high, but certainly not unreasonable. That would give the stock a fair value of $64, which is about 13% above where it is today.
    Maybe it’s not that boring after all.
    dhr.bmp

  • Financial Service Ads
    Posted by on December 3rd, 2005 at 1:43 pm

    I usually watch CNBC during the day with the sound turned off. One of the drawbacks of the network is that it seems like there’s a total of five different commercials that are run over and over again.
    Obviously, most of the ads are for financial service firms. The problem is that these ads are almost always awful. They’re designed to appeal to the narcissism of baby boomers. Even Sir McCartney has gotten into the act. He’s pitching for Fidelity.
    The general message of these ads is that “Sure you’re wealthy, but you’re still ‘real.’ You haven’t ‘sold out.’” Look, if you’re even worried about retirement planning, you’ve sold out. Sorry, but it’s true. Plus, you don’t need your authenticity confirmed by, of all things, your choice of mutual fund company. Investing is business. You’re not buying a lifestyle.
    The ads show things like retirees helping villagers in Africa. There’s even one that has a senior skateboarding. Please. In a Wall Street Journal op-ed, Melanie Wells takes aim at the financial service ads.

  • The Market Today
    Posted by on December 2nd, 2005 at 7:13 pm

    Holy crap, we kicked ass today! The Buy List was up 0.75% while the S&P 500 was up a puny 0.03%. For December, we’re already one full percent ahead of the market. I don’t want to get too optimistic. My goal is to outperform the market by a few percentage points a year. Days like today are nice, but our focus is still on the long-term.
    We were helped today by three surging medical device stocks, Biomet (BMET), Zimmer (ZMH) and Stryker (SYK). I just don’t get how Biomet can be 20% off its high.
    An AP story picked up on the rise in this sector:

    Comments made at a Merrill Lynch conference on Thursday were likely pushing the stocks upward, said John Farrall, a health-care analyst with National City’s Private Client Group.
    One panel at the conference included a discussion about how negotiations with the Japanese government regarding biannual price reductions suggest that the price cuts won’t be as drastic as expected, Farrall said in a note to investors.

    Incidentally, the Japanese Nikkei finally broke 15000. To put that in perspective, during the closing days of 1989, the Nikkei was near 39000.

  • Cisco: A Victim of its Own Success
    Posted by on December 2nd, 2005 at 11:12 am

    Forbes has an interesting take on the Cisco/Scientific Atlanta deal:

    As is the case of so much in the technology world, the deal’s real promise lies in the future. Cisco reached out of its networking niche to buy Scientific-Atlanta, looking to better position itself as a broader provider of products and services to cable operators.
    Cisco wants to provide all things networking to business and home, and it sees its ability to integrate a wide array of products as pivotal to its future success. This is a strategy that builds on the company’s already substantial size but doesn’t necessarily spur the rapid growth that investors want to see.
    To this end, Cisco touts its so-called “advanced technologies,” which are business areas that the company predicts can eventually account for $1 billion in annual sales.
    Since these businesses are but small pieces of the overall company, their growth rates are faster. Sales of Cisco’s six advanced technologies rose 25% in the previous quarter. Still, this segment makes up under 20% of Cisco’s overall sales.
    Another area of concern for investors is the company’s international penetration. Cisco is able to draw only 17% of its sales from Asia-Pacific, including Japan–a level that’s held steady for the past two years. North America accounts for more than half of Cisco’s sales.
    Order growth in Asia-Pacific came up strong in the most recent quarter, hitting 30%, a level that hadn’t been reached in the previous four periods.
    Altogether, Cisco is a company that has become a victim of its own success. It dominates the networking market, so there is little left there for the company to capture. It is branching out into new but related areas via its advanced technologies, but those segments remain moderate contributors to the overall business.

    Today is shaping up to be another good day for us. Stryker (SYK) and Zimmer (ZMH) have nice gains this morning. The rest of the market has barely moved.
    This government reported that job growth is picking up after the hurricanes. The economy added 215,000 jobs in November, which is almost exactly what Wall Street was expecting. The unemployment rate held steady at 5.0%.

  • John Buckingham on Financial Stocks
    Posted by on December 2nd, 2005 at 6:23 am

    I’m a big fan of John Buckingham. He’s a value investor and the president of Al Frank Asset Management. In this morning’s WSJ, he has some thoughts on why financial stocks look good despite the flattening yield curve:

    The yield curve is flattening. While that may surprise the occasional World War II aviator dug out of a California glacier, by now most investors are well aware there is little difference between short- and long-term interest rates.
    Conventional wisdom argues that a flat yield curve is detrimental to the earnings of banks and other financial companies, since their ability to profit from lending at relatively high long-term rates and borrowing at relatively lower short-term rates is diminished. But investors with an investment horizon longer than a few weeks shouldn’t let these concerns dissuade them from holding financial stocks.
    The lion’s share of selling because of the yield-curve has already happened. And it isn’t even certain that a flattening yield curve will wreak havoc on financial-sector profits. History shows most banks, savings and loans (those that survived the turmoil of the late-1980s) and brokerage firms have been able to smoothly navigate through all sorts of interest-rate environments. Be it their ability to hedge interest-rate risk with derivatives, reap significant recurring income from fees, or diversify into complimentary businesses, earnings for financials haven’t been that interest-rate sensitive for a decade or so.
    That doesn’t mean financial stocks are immune to shifting rates, but it does mean that because so many investors are convinced otherwise — and, more importantly, have adjusted portfolios accordingly — opportunity knocks for investors looking for bargains in the sector. Two examples: Bank of America, the No. 2 bank in terms of stock-market capitalization behind Citigroup, trades at 11 times its earnings from the past 12 months, and has an annual dividend yield of more than 4%. Countrywide Financial, a diversified bank and leading home lender, has a trailing P/E of nine and a 1.7% dividend yield. (Al Frank funds invest in Bank of America and Countrywide.)
    More industry consolidation is likely to be a positive catalyst going forward, and investors could soon warm to the relatively consistent growth exhibited by most players in the sector, the below-market P/E ratios and the generous dividend yields. Most folks have shown little interest in midsized and large-cap names that dominate the financial space — small caps, with great growth potential, have been all the rage — but in the long run, value almost always gets recognized. This thinking goes against the grain. But after all, as J. Paul Getty once said, “If you want to make money, really big money, do what nobody else is doing!”

  • Financial Guru Charged With Tax Fraud
    Posted by on December 2nd, 2005 at 5:17 am

    Remember Wade Cook? Me neither.

    Federal prosecutors accuse Wade B. Cook, 56, and his wife Laura of concealing nearly $8.9 million in seminar fees and book royalties from 1998 to 2000.
    Wade Cook conducted hundreds of the seminars on asset protection, stock investing, real estate acquisition and avoidance of income tax, the U.S. attorney’s office said in a statement. His books include “Wall Street Money Machine,” “Wealth 101” and “Business by the Bible.”
    In tax returns filed for 1998, 1999 and 2000, the couple reported adjusted gross incomes of about $350,000 annually while concealing the additional millions, prosecutors contend.
    According to court papers, the Cooks created a phony tax-exempt entity that purportedly was to benefit the Mormon Church but did not. In fact, documents said, the Cooks were concealing royalty income they spent on such things as show horses, his-and-hers Cadillacs and a $20,000 baby grand piano for an associate.

  • The Market Today
    Posted by on December 1st, 2005 at 6:14 pm

    Now I can get used to this! The market rallied strongly today with the S&P 500 jumping 1.22% and our Buy List rising 1.45%. Hey, we’re already beating the market for December. Today was the market’s best day since November 3.
    Only two of our stocks went down, one was Donaldson (DCI) which had a great day yesterday. Varian Medical (VAR) made a new 52-week high and several other stocks are close to new highs. Also, Prudential initiated coverage of Frontier Airlines (FRNT) with a “neutral” rating. I’m not sure what a neutral rating means, but there you go.
    Yesterday I talked about how Wall Street has become a dual market—energy stocks and everything else. Today was another good example of that. Here’s how the sector spyders performed today.
    Energy………..3.17%
    Materials……..1.95%
    Tech……………1.52%
    Discretionary..1.15%
    Industrials……1.11%
    Health Care….1.01%
    Staples………..0.68%
    Financials…….0.53%
    Utilities………..0.38%
    Notice how the other sectors are somewhat bunched together, but energy is off doing its own thing. It’s like this almost every day. Each day’s overall direction has almost no influence on what energy stocks will do.
    If you want to beat the market in 2006, I think all you have to do is avoid energy. Plus, you’ll have less volatility.
    The outlook for interest rates may be changing. Gold hit a 22-year high today. Futures traders expect that the Federal Reserve will raise interest rates again in two weeks. The futures also say that there’s a 90% chance of another increase on January 31, but only a 60% chance of another increase in March. If Wall Street thinks the Fed is done, the market could rally well into 2006.